THE “DADDY STATE AGENCY”
My latest AIP article is up, albeit with a different title: “CFPA Gone Elitist?” I like the title I gave my piece so there.
But really, if there was ever a case that revealed liberal elitism, snobbery, and their unshakable belief that they know what is best for everybody else because, at bottom, we’re just a bunch of goober chewing, gun toting, Jesus loving, inbred ignoramuses who can’t take care of ourselves, the proposed Consumer Financial Protection Agency is it:
The point is, Obama’s CFPA will play the role of National Papa by forcing financial services institutions - banks, mortgage companies, brokerage firms - to limit the sale of complicated financial products only to those customers who can grasp their complexity and hence, manage the risk.
This elitist idea is the result of the belief by some liberals that too many consumers were snookered by unscrupulous loan companies and bought mortgages that they should never have purchased. These sub-prime loans had balloon provisions that would kick in after a few years, dramatically increasing their interest rate and with it, their monthly payments.
No doubt some loan sharks did indeed either fail to follow the law and fully disclose all the risks associated with such a loan or simply lied. Laws are already on the books to deal with these criminals who prey on those who are less sophisticated in financial matters than others. Full disclosure laws have been a part of the financial industry for many years and there are clear guidelines regarding the disclosure of all risks and obligations of the consumer.
But that’s just not good enough, say the Daddy Staters. We’re too stupid to know what’s in our best interest and even if we read all the disclosure information, we’re too unsophisticated to understand it.
Enter the CFPA who will sit us down in the government family room not to help us make our own choices in financial matters, but to lay down the law and back it up with a shaving strop.
One of the recommendations to financial institutions who will segregate their products into easy to understand, “vanilla” offerings and more complex instruments, is to give consumers a test to weigh their knowledge of financial matters in order to determine whether they are capable of getting a home loan or purchase some other financial instrument.
Neat, huh?
The problem is that if a financial company sells a more complex offering to a consumer and it goes south, the customer can go running to the CFPA with a complaint or sue. In other words, if you like medical malpractice, you will love the new CFPA.
I would be unable to pass even a beginner’s test on financial matters. And devising a test to measure if a consumer has the knowledge to “understand” the risks involved in buying a product will be an interesting exercise. If they make it too easy, they leave themselves open to trouble. If they make it too hard, they lose a lot of business.
There are other problems with the new agency as well. Read my whole piece.
Yeah, it gets my back up too.
It’s true that consumers are essentially idiots when it comes to financial matters. (I am.) But I think the point should be to create genuinely clear, concise, more-or-less idiot-proof disclosures.
For example, for any deal have a one-sheet. Minimum 12 point type. Lots of white space. Clear bullet points. “Here’s what you’re paying today.” “Here’s what you might have to pay if this goes south.” “Here’s how much I, your broker, am making from this.”
Make sure the form is written by an English major not a lawyer.
One sheet. Big type. Clear sentences. Real numbers. And provide a government number the person can call for more explanation before they sign.
Comment by michael reynolds — 8/4/2009 @ 8:14 am
So I read your article. I’ll agree that having a bureacracy design a test would result in something akin to a giraffe–putting in a little bit of everyone’s idea results in an ungainly beast. But to think that this is new is incorrect. The idea has been around for at least 25 years, if not longer. There have always been investments that are classified as those available to a “qualified investor,” a term with a very real definition (income totals, asset levels, etc.). Experience is always an important part of the equation–no investment experience, no investment in riskiy ideas. With the explosion of financial engineering over the last 15 or 20 years, all sorts of really clever ideas have become available to people who have no idea of what the investment does, what it doesn’t do, and what happens if something really unexpected happens (a second or third standard deviation event, as they are called). Here’s an example:
In most markets, you have always been able to invest to take advantage of what you think will happen to interest rates. Buy a bond, you believe rates will stay the same or go down and not hurt you. It’s a little trickier if you think rates are going up, but you can use options or futures to bet against interest rates. The risk on betting against rates with options or futures is that your loss can be mutltiples of what you invest, so there are tests to see if you know what you’re doing (self protection from the brokerage firms, mostly). In the last few years, there is an investment called an exchange traded fund (ETF) that anyone can buy (trades on an exchane like a stock). Their original intent was pretty benign (mimic the S&P 500 returns with a lower cost than other alternatives), but - surprise! - the financial engineers have taken ahold of them. You can now easily bet against interest rates. More than that, you can leverage that bet and invest in something that moves twice as much as interest rates do. I’d be willing to bet many investors don’t realize what they’re investing in or the implications of changing interest rates. I say that because the same thing happened with similiar investments in the early ’90s (Collateralized Mortgage Obligations, or CMOs). And I’m not the only one. Full service brokerage firms are beginning to ban the trading of those instruments by the “retail” investor (maybe in reaction to the CFPA coming guidelines) because of the potential quick and severe losses by individuals.
You could argue that people, if they want to be stupid, should be allowed to be stupid. The problem is that, in the end, it will fall to you and me to get them through old age with no money. I say that because, at heart, we’re not going to let old people starve to death, living under bridges in major cities around the country. And if you don’t think that could happen, you haven’t been paying attention.
Comment by Larry, your brother — 8/4/2009 @ 9:12 am
This and several other blogs often challenge me intellectually, therefore I believe there should be a government Czar administering tests to determine which blogs one can or cannot read. Left to the population at large some people will get in way over their heads, may come to the wrong conclusions, or be “tricked” or actually FORCED into accepting something they might otherwise not accept. The alternative would be to “dumb-down” bloggers. Lot’s of white space. Big fonts. Limit blogging to English majors who use simple to understand and inoffensive language. That would work too.
Oh, and don’t use a hair dryer while in a tub full of water, or eat the content of those little packets shipped with some products. Ya bunch of dummies.
Comment by DoorHold — 8/4/2009 @ 12:30 pm
I would add my 2 cents, but Scott Adams already went through the reasons why something like the CFPA is inevitable:
http://dilbert.com/blog/entry/investing_in_individual_stocks/
Comment by Surabaya Stew — 8/4/2009 @ 6:53 pm
The Bill is in many stages of development and there is zero way of knowing how much input is coming from Dr Emanuel or Holdren. Why would Obama not appoint Dr Emanuel? Of course he would.
Comment by Dennis D — 8/9/2009 @ 10:56 am